Facebook is going into the banking business with blockchain

Facebook is going after the banking business with a new digital currency and financial transaction network all based on blockchain.

After months of speculation and rumor, Facebook today announced it is creating a fiat-backed cryptocurrency that can be stored in digital wallets and used by consumers and others to transfer funds or make purchases anywhere in the world.

Calibra, Facebook's digital wallet, will store Libra, Facebook's digital currency. A Facebook user would download the Calibra digital wallet application, purchase the Libra digital currency through a financial network, and then perform peer-to-peer digital money transfers through Calibra as a stand-alone app. A user could also do the same thing through Facebook's most popular communication platforms: WhatsApp and Messenger.

The cryptocurrency platform is expected to launch sometime in 2020.

The cryptocurrency app will allow Facebook users to send, add or withdraw money "in just a few taps," using WhatsApp, and it will allow someone to fill their wallet, cash out or split a restaurant tab all using Messenger, the company said.

Facebook

Images of the Calibra digital wallet app.

"We hope to offer additional services for people and businesses, such as paying bills with the push of a button, buying a cup of coffee with the scan of a code, or riding your local public transit without needing to carry cash or a metro pass," the company explained on its Calibra page.

The Calibra app will also show exchange rates for changing fiat currency, like the U.S. dollar, into Libra digital currency and back again. Because it's based on blockchain, Facebook is cutting out the middleman – a central bank or clearing house; that eliminates the majority of costs associated with financial transactions today.

"Transaction fees will be low-cost and transparent, especially if you're sending money internationally. Calibra will cut fees to help people keep more of their money," Facebook said.

The underlying blockchain transactional network will be able to handle thousands of transactions per second; data about the financial transactions will be kept separate from data about the social network, according to David Marcus, the former president of PayPal. He is now leading Facebook's new digital wallet division, Calibra.

Aside from limited cases, Calibra will not share account information or financial data with Facebook or any third party without customer consent, the social network said in a statement. "This means Calibra customers' account information and financial data will not be used to improve ad targeting on the Facebook family of products," Facebook said.

Calibra and its underlying blockchain distributed ledger will scale to meet the demands of "billions," Marcus said in an interview with Fox Business News this morning.

Libra is different from other cryptocurrencies, such as bitcoin, in that it is backed by fiat currency, so its value is not simply determined by supply and demand. Bitcoin is "not a good medium of exchange today because [fiat] currency is actually very stable and bitcoin is volatile," Marcus said in the Fox Business News interview.

"First and foremost, to use Libra you will not need to use a Facebook product if you don't want to. There will be plenty of wallets offering similar services that Calibra will offer," Marcus said. "So you can choose whatever wallet you want and, by the way, all will be interoperable with each other because they'll run on top of the same [blockchain] network."

Marcus was vice president of messaging products at Facebook, overseeing Messenger and WhatsApp, when he joined the board of cryptocurrency exchange Coinbase in 2017; it was an early indicator of things to come. Earlier this year, Facebook confirmed it had been working on a blockchain project for some time but declined to offer any details.

Marcus today said his group has been working on the project for a year.

Facebook will secure financial transactions made through its digital wallet app in several ways, Marcus said. For one, Facebook will not be in charge of governing the blockchain network; that will be under the auspices of a non-profit group, the Libra Association, made up by dozens of other companies. Today, the Libra Association boasts 27 founding members, including Visa, Mastercard, PayPal, Uber, Lyft and Coinbase. By the time Calibra launches, Facebook hopes to have more than 100 other companies and consortiums in place to govern the network.

Facebook

Members of the Libra Association, tasked with governing Facebook's permissioned blockchain network.

Additionally, all accounts and transactions are verified and fraud prevention is built in throughout the app. Accounts are verified with government-issued IDs, such as a driver's license, so users can be certain other users are who they say they are. Facebook and WhatsApp account information are also used when available to verify identity and prevent fraud.

Calibra also has in-app reporting and dedicated customer service. "In the rare event of unauthorized fraud, you will receive a full refund," Facebook said in an FAQ.

While some banks and credit card services and payment processors are partners with Facebook in the Libra Project, they are also major competitors, according to Avivah Litan, a Gartner vice president of research.

"All of these mega companies and brands are vying for consumer wallet share. Apple, Amazon, Google and other online networks will also want this market, as they have forayed into payments themselves and will likely get into cryptocurrency if Facebook succeeds," Litan said.

Facebook's Libra Project appears to be a hybrid blockchain; in essence, it uses a permissioned blockchain to connect to banks to verify and onboard users, then it uses a public blockchain to enable the users to transfer or spend funds, according to Jorden Woods, a managing partner at consultancy DoubleNova Group.

The Libra Association, who will be the blockchain validator, looks like many other permissioned blockchain consortia, with very strict rules on who can join, Woods said.

"The validator nodes are permissioned and people will need to use a government issued ID for [know-your-customer/anti-money laundering] purposes to create an account. It looks potentially fully permissioned to start," Woods said. "In essence, everyone needs to be vetted and given permission to join on both the consumer-facing frontend and business-facing backend."

So, if Facebook is offering its service at low cost and it's not governing it, how does it profit? For one, the social media giant will be able to generate ad revenue, since there will be more conversion of consumers who view ads.

"It will be easier for [users] to buy the goods and services without having to type in their credit card as they have to do on most mobile interfaces," Litan said.

It will also be a more attractive ecommerce marketplace that gains sellers and buyers in growing economies where access to e-money services for transactions may be limited, according to Litan.

"Essentially, cryptocurrency available through the Facebook wallet opens the marketplace up to sellers and buyers in growing economies who don't necessarily have active or any bank accounts," Litan said.

Facebook confirmed as much, noting that for many people around the world "even basic financial services are still out of reach.

"Almost half of the adults in the world don't have an active bank account and those numbers are worse in developing countries and even worse for women. The cost of that exclusion is high – approximately 70% of small businesses in developing countries lack access to credit and $25 billion is lost by migrants every year through remittance fees," Facebook stated.

Jonathan Johnson, a board member of Overstock.com and president of its venture capital arm, Medici Ventures, said stablecoins like the one Facebook is launching lessen volatility and are easier for a novice to use comfortably. The IRS, Johnson predicted, is going to need to start treating cryptocurrencies like fiat currencies – not assets – "otherwise it is too complicated from a tax perspective to use them.

"Facebook's endorsement and use of cryptocurrency will drive greater mass adoption," Johnson predicted.

More than five years ago, Overstock.com became the first major retailer to accept bitcoin as a form of payment for goods. Today, it accepts more than 40 versions of the digital currency for online purchases.

About the same time Overstock.com was embracing bitcoin for payments, it put a venture capital stake in blockchain distributed ledger technology (DLT) through Medici Ventures, its Salt Lake City-based subsidiary.

Medici Ventures focuses its investments on six key emerging areas of blockchain adoption: capital markets; money and banking; identity management; property; voting; and underlying technologies supporting blockchain. The company has to date invested in a dozen start-ups using blockchain as the basis for their products.

Medici Ventures COO Joel Weight said with its move into blockchain and cryptocurrency, Facebook can do for global crypto payments what eBay did for online payments with Paypal.

"Facebook's user base with Facebook, Instagram and Whatsapp is massively global and may convince many new people to enter the cryptocurrency space," Weight said via email. "This feels like a page out of the Alibaba Group playbook (Alipay), which I believe has been very successful."

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